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Over the past several years, Apple (AAPL 3.68%) has become the model for what tech companies want to be when they grow up. In the decade leading up to November 2021, Apple’s revenue nearly tripled — a remarkable feat for a company its size — pushing its stock price up nearly 1,000%.
Oh, how the mighty have fallen. COVID-related lockdowns at its main production facility, 40-year-high inflation, and macroeconomic uncertainty have weighed on the iPhone maker, which has shed 31% of its value and $1 trillion from its market capitalization since early last year.
Despite the current stock price, I believe Apple is poised for a surprisingly strong comeback this year. Here are three predictions about what to expect from Apple in 2023.
Image source: Apple.
Late last year, Apple confirmed rumors that had swirled for weeks, saying that “COVID-19 restrictions have temporarily impacted the primary iPhone 14 Pro and iPhone 14 Pro Max” at the assembly plant in Zhengzhou, China. The company went on to say that the significantly lower capacity resulted in reduced output and shipping delays for many customers.
It’s logical to conclude that these issues will weigh on the results of Apple’s December quarter, which includes the important holiday shopping season. The company’s inability to keep up with strong demand for the premium iPhone 14 models will likely mar what is normally Apple’s biggest quarter.
It’s important to put those issues — which are completely out of Apple’s control — into context. Over the preceding year, Apple has had four successive quarters of record revenue. Does that sound like a company in trouble?
Furthermore, Apple has taken steps in recent months to diversify its supply chain. Various media reports suggest the company is moving some of its device production to India, Vietnam, and/or Thailand. In the future, these moves will allow Apple to ramp up production in some locations if constraints force cutbacks in others.
While estimates vary, Apple has long been a leader in the worldwide smartphone market, alternating between No. 2 and No. 1, occasionally swapping places with Samsung. As recently as the 2021 fourth quarter, Apple had a 22% market share, topping Samsung’s 19%. It hasn’t held the top spot since — but that only tells part of the story.
Sure, Samsung often leads in terms of the number of phones shipped, but Apple’s reputation for quality and premium brand allow the company to charge much more for devices than its rivals — which gives the iPhone maker the vast majority of revenue and profits in the industry.
In the second quarter of 2022 (the last quarter for which the data was tabulated), Apple collected 40% of the smartphone industry revenue, with Samsung taking up a distant second with 24%, according to Counterpoint Research. The contrast is even starker on the bottom line as Apple captured a massive 80% of operating profits in the industry, leaving Samsung with less than 20%, and crumbs for other rivals.
This makes Apple the clear industry leader, in terms of both revenue and profits. Expect that leadership to continue.
Apple raised eyebrows in its fiscal 2022 fourth quarter (which ended Sept. 24), when the company revealed that its seemingly invulnerable services segment had hit a wall. Revenue for this segment grew just 5% year over year — its slowest rate of growth ever.
Consumers have been feeling the pinch of higher prices at the grocery store and the gas pump, so it’s inevitable that something had to give — but don’t expect the services business to be stagnant for long.
Apple recently raised the price of its Apple Music service by $1 (and by $2 for family plans). The company pointed out that the price hike covered increased royalties to the artists. Apple TV+ is also increasing its subscription cost by $2 per month — the first such increase since it debuted in late 2019. Similarly, the Apple One bundle — which includes Apple Music, Apple TV+, Apple Arcade, iCloud, and other services — will raise prices on its individual, family, and premier plans by $1, $2, and $3 per month, respectively.
With more than 900 million paid subscribers and more than 1.8 million active devices in the wild, there will always be a market for Apple’s services. Once the economy is on better footing, expect the segment to return to double-digit year-over-year growth.
As I pointed out, Apple stock has fallen victim to the bear market, down roughly 31% from its high reached late last year — and the stock could still fall further. At the same time, Apple has continued to grow revenue, albeit at a more moderate pace. Furthermore, the company’s price-to-earnings ratio of 20 is very near that of the S&P 500. That suggests its valuation is pretty reasonable, especially in the context of its ongoing opportunity and history of strong execution.
While much depends on how long the economic uncertainty remains, history suggests that Apple will rebound strongly when macro conditions improve. After shedding more than half its value during the Great Recession, Apple stock soared 164% over the following year. So it may not be going too far out on a limb to say Apple could recapture its $3 trillion market capitalization in 2023.
Danny Vena has positions in Apple. The Motley Fool has positions in and recommends Apple. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
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